Wednesday, November 10, 2010

Budget Panel's Tax Proposals; Completely Unworkable

This is interesting. The deficit reduction commission has released their plan, which is available here.

Here's what I find most interesting:

None of the proposals would take effect next year to avoid disrupting the economic recovery. Bowles said income-tax rates would be reduced to three levels: 8 percent, 14 percent and 23 percent.

Wiping out all tax breaks, including the home mortgage deduction, while lowering rates would save $100 billion a year, Bowles said. Members of the panel could decide to keep some tax breaks by offering offsetting cuts, he said.

First, I'm a tax lawyer by profession, so I deal with the code every day. I'm also one of the few people who has actually read pretty much most of the code.

Here's what I think they are thinking, which is purely conjecture on my part. If we eliminate all the deductions, then the IRS' compliance burden is greatly reduced. Hence, they lower the cost of tax administration. In addition, I'm thinking the rates they come up with would be the rates the average person in the tax bracket winds up paying anyway. (Again, this is pure conjecture).

While this is a nice idea in theory, there is no way it's going to be implemented. Here's the basic problem: off the top of my head, I'd say at least 35% of all the tax code sections are special interest giveaways. In addition, every year, Congress tinkers with all sorts of aspects of the code, as a sop to some special interest. The only way for this to work is if all the special interest deductions go away -- as in every single one. If you leave in one, then someone else will say, "what about mine? In addition -- none of them can ever come back, because as soon as one comes back, you open the doors to all of them. In other words, the basic premise underlying implementation is politically unworkable.

My initial thought is this is a document full of wonderfully magical thinking -- meaning, it's full of a lot of proposals that will never see the light of day. Basically, it says we can cut taxes and spending and balance the budget.